Krugman on Canada

Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. Economists in both countries cheerfully declared that the era of severe recessions was over.

But when things fell apart, the consequences were very different here and there. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?

It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis. …

Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.

One thing I would add to Krugman’s analysis is that in Canada there is no income-tax deduction for home-loan interest payments, which means that home-buyers here aren’t encouraged by the government to buy homes they might not otherwise be able to afford. It also means that there is less real estate speculation. Yet: the percentage of Canadians who own their homes is basically identical to the percentage of Americans who do. And we have avoided the kind of housing bubble that wiped out so many Americans.

Canada also has the lowest debt-to-GDP radio of any of the G8 countries (under 20%). During Chretien’s reign, virtually every year the government ran a surplus to pay down the debt. We are thus not owned by China.